Antecedents of purchasing concentration: A transaction cost explanation

Abstract

The present study develops a model that explicates the relationship between purchasing concentration strategies and transaction governance, i.e., whether purchasing arrangements are organized in a marketlike fashion using arms-length exchanges with many suppliers, versus intermediate form governance (Williamson, 1985) that involves interorganizational relationships with one or a few suppliers. Three purchasing concentration decisions—the number of sources, how total purchasing volume is distributed among all sources, and the actual proportion allocated to a particular supplier—are the focus of an empirical study conducted in the chemical industry. This research examines how these outcome variables are influenced by specific investments dedicated to a particular supplier and environmental uncertainty, two key factors cited in transaction cost theory as determinants of transaction governance. Overall, our results support the expectation of greater purchasing concentration when buyers commit to specific investments. Conversely, environmental uncertainty, in its own right, is found to lead buyers to avoid purchasing concentration by distributing purchasing volume more evenly over all sources and to moderate the effect of specific investments on the allocation to a focal supplier.